A regulatory backlash is under way as the US body politic comes to grips with the financial crisis. Wall Street – or what is left of it – is first in the line of fire. But the era of excess was as much about policy blunders and regulatory negligence as about mistakes by financial institutions. As Washington creates a new system, it must also redefine the role of the Federal Reserve.

Specifically, the US Congress needs to alter the Fed’s policy mandate to include an explicit reference to financial stability. The addition of those two words would force the Fed not only to aim at tempering the damage from asset bubbles but also to use its regulatory authority to promote sounder risk management practices….

By adding “financial stability” to the Fed’s policy mandate, I am mindful of the pitfalls of multiple policy targets. However, single-dimensional policy targeting does not cut it in a complex world…

But hindsight offers little doubt of the bubbles that developed over the past decade – equities, residential property, credit and other risky assets. The Fed wrongly dismissed these developments, harbouring the illusion it could clean up any mess later. Today’s problems are a repudiation of that approach.

Roach seems blissfully unaware that the Fed has already assigned itself the duty of achieving financial stability without any Congressional authorization. From the central bank’s website:

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve’s duties fall into four general areas:

conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

We took umbrage earlier that the Fed was engaging in mission creep, assigning itself duties not authorized by Congress: In a post dated August 22:

Readers can find a sampling of other discussions on this very topic in “Robert Shiller Pushes Fed as Stability Regulator” (April), “Waldman: Halt the Fed’s Mission Creep” (May). We have been decidedly cool on the idea, largely because the Fed has put the “financial stability” under its list of duties since at least 2003 (that was the date assigned to the first version of that statement that we saw at the Fed’s website), and the Fed certainly did not comport itself well in recognizing, let alone intervening in, explosive, destabilizing credit growth in recent years.

Evidence for Greenspan’s presentations to Congress in the dot-com bust expressed concern that the fall in stock prices could have a detrimental impact on growth due to a fall in consumer wealth. This was the first time any Fed chairman had even formally taken the view that the level of stock prices was part of his job, although the Wall Street Journal had earlier reported on the Fed chairs’ obsession with the stock market. Thus, the famed Greenspan put, the Feds’ famed quick trigger response to falls in stock prices, was in fact based on a misguided view that this was in fact pro-stability.

In other words, I see little reason to give a regulator responsibility for a role it assigned itself and botched horribly.

One and the same.For some reason there is a stated difference between the FED’s regulatory structure/role and the collective policy actions taken by the bankers themselves.The FED is the bankers.The bankers are the FED.As should be becoming painfully obvious in these times.Within the amalgamated “financial services industry”, we have all of the members of the groups who thought to make, sell and repackage mortgages into SIVs and all the other alphabet soup of paper things going on out there.In so doing, they were responsible for creating the brittleness and vulnerability of that system, or, in other words, to set-up the threat to financial stability.Given that it is no one else’s role to “maintain financial stability” and given the FED’s role to provide for economic growth and prevent inflation, the FED has the implied power and the implied responsibility.But the FED itself is part and parcel of the private banking system in this country.It is not an agency of government.The people who work for the FED are not part of the government.They ALL work for the private self-regulated banking system in its many parts.The problem isn’t related to the FED’s role in the creation of this financial monster.That’s a given.The problem is the lack of a true governmental role in setting clear responsibility and accountability standards and methods for the private banking cartel, and a final, clear, greater-than-arms-length regulatory structure between a bank-driven monetary policy of irrational exuberance and the economic well being of the average American worker.

Roach has said this many times now. By “financial stability”, he usually meant that FED has a responsibility to stop a bubble in the formation.

But when Greenspan/Bernanke talked about “financial stability”, they usually meant that the FED had a responsibility to support the financial system when a bubble bursted. (And Greenspan always argued that it’s impossible to spot a bubble before it exploded.)

Matt Dubuque is absolutely right. Greenspan could have deflated the dot.com bubble without impacting the real economy in any way, or changing the federal funds rate, simply by raising the margin requirements for the purchase of stocks (or, even better, eliminating margin buying of stocks altogether).Why in the world should ANYONE, EVER, be allowed to buy stocks and bonds on margin? It is ridiculous. No one NEEDS to own a stock or bond. And it is MASSIVELY DESTABILIZING – both going UP and coming DOWN. Unless all margin loans are against the law you can count on more booms and busts in the stock market.

Similarly, the housing bubble could have been pricked or never been allowed to develop, if bank regulators had done their jobs. Which also seems to come under the Fed’s definition of its responsibility:

“supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system”

Every bank that fails is a clear indictment of the INCOMPETENCE or criminal negligence of the Federal Reserve and the FDIC.